Investing is a key aspect when it comes to building wealth. There are several asset classes where you can invest and grow your wealth. A few common and easy-to-invest-in asset classes are mutual funds and stocks. However, you might be confused about the asset class that best suits your needs.
In this blog, let's break down the basics of both asset classes, their differences, and how you can pick the investment that suits your criteria.
Mutual Funds Vs Stock Investments
|
Stock |
Mutual fund |
Meaning |
Holding a single share in a company |
Holding a unit that's derived from holding a portfolio of stocks |
Style of Investment |
Active |
Passive |
Deciding Agency |
Investor |
Professional fund manager |
Costs |
Commissions when you buy and sell; no ongoing fees after purchase |
expense ratios and exit loads applicable |
Diversification |
Only as part of a well-diversified portfolio |
Built-in diversification in a single investment |
Risk |
Higher; performance tied to a single company |
Less than investing in direct stocks; risk is mitigated through diversification |
How it trades |
During regular market hours |
Once per day |
Beginner friendliness |
you have to do your own research and analysis |
A Fund manager does the research and analysis |
Taxes |
You control capital gains by timing when you sell |
You can owe capital gains taxes even if you don’t sell your shares ​​​​​​​ |
Choose the right investment that suits you
New to the Stock Market
If you are a new investor with little or no experience in the stock market, it is wise to start your equity investments through mutual funds. Not only do these funds carry a lower risk, but they also come with the benefit of having a professional fund manager overseeing your investments.
There are various types of equity funds that you can choose from. It's best to choose a plan that matches your investment horizon and goals.
Assessing Your Risk Appetite
If you have a higher risk tolerance, investing in individual stocks might be more appealing to you. Individual stocks are subject to market fluctuations. The performance of one stock cannot compensate for the poor performance of another.
Diversified equity mutual funds reduce risk by spreading investments across multiple sectors. Depending on your risk taking ability, you can choose the mode of your investment.
For example, index funds offer a passive investment that provides returns in line with a market index and are less risky than sector funds that invest in a single sector.
You can choose from various equity funds such as index funds, flexi-cap funds, sector funds, ELSS, or large-cap funds based on your risk and return expectations.
Considering Your Time Horizon
Both stocks and equity funds are best suited for long-term investment horizons. With equity funds, you can adopt a buy-and-hold strategy to achieve your long-term financial goals.
With stocks, you can wait for them to grow over the long term or plan your exit.
Tax Benefits
Investing in individual stocks does not offer any tax benefits. Rather, you end up paying taxes on any short-term and long-term gains.
However, if you invest in tax-saving mutual funds known as Equity Linked Savings Schemes (ELSS), you are eligible for a tax deduction of up to Rs 1.5 lakh per annum under Section 80C under the old regime.
Cost of Investing
Investing in an equity mutual fund spreads your investment across approximately 50 stocks. It helps to protect your investment from market volatility and reduces the cost of investing.
Diversifying a stock portfolio across 50 stocks individually would require a substantial sum of money, but equity-diversified mutual funds achieve this at a much lower cost.
You can start investing in equity mutual funds with as little as Rs 500 per month through an SIP and benefit from rupee cost averaging. So if you have a little money to spare every month, it's better to begin your investment journey with a mutual fund.
Investment of Time
Investing in mutual funds requires less time to research individual stocks since the fund manager handles your investment, with the research team selecting the right stocks.
But before investing in an equity fund, you should check important parameters such as the fund's portfolio, the track record of the asset management company (AMC), assets under management(AUM), and the investment style of the fund manager.
Conclusion
We hope this has clarified the differences between mutual funds and stocks, helping you decide which is the better investment option for you.
If you wish to benefit from the inflation-beating returns of equities without facing the challenges of direct stock investing, and you are limited by time and expertise, investing through mutual funds is the ideal solution.​​​​​​​
However if markets excite you and you are willing to put in the time and effort, direct stock investment is a good option.
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